Global Family Law Services

In divorce, separation of business not easy

| Dec 20, 2013 | Divorce, Family Business, Property Division

This article originally appeared as a column for the Cleveland Jewish News.

When divorcing clients first enter my office they often already know, even if they don’t like it, that their assets will be divided in an equitable typically, equal manner. But, as King Solomon understood, some things just can’t be cut down the middle without utterly destroying them.

In the context of a divorce proceeding, aside from the kids, the most obvious examples of this are the business and the house. That doesn’t mean a fair division is impossible. It just means we do it in a different way.

But, in cases in which the children can go back and forth between households and a house can be put up for sale, a business is “split” differently. Not only is a business an income source, it is also an asset. It might even be a family legacy. Often it represents hopes, dreams and sweat equity, and has enormous emotional value. And, in nearly all cases, it is preposterous to presume it would be simply sold, it would be split, or that the former spouses would simply continue as joint shareholders and be able to successfully manage it together after a divorce.

According to statistics from the U.S. Small Business Administration, far more than 20 million small businesses exist in the United States. Small business owners engage in all sorts of activities, from multilevel marketing sales (such as Mary Kay and The Pampered Chef), to retail sales (at brick-and-mortar stores or via websites like Etsy or Ebay), to franchise ownership, to service firms (doing things like consulting, construction, or design), to manufacturers. Consequently, these issues come up quite frequently.

So what happens to a business in a divorce? In the broadest of terms, one party will usually keep the business. The other will relinquish all claims to future growth and will have no responsibility for future liabilities. The spouse giving up the business will then get half of the marital value of it. Most often, the identity of the retaining party is pretty clear.

Perhaps only one spouse has been actively involved in the startup and management of the business, or maybe it is a family business that has been operating for a few generations. It is only logical that someone who can’t take a decent snapshot or repair a car isn’t going to take on a business focused on providing those services. And it could get really uncomfortable or even downright nasty to remain jointly involved in a business, especially if your ex-spouse’s family is involved too.

The more challenging part is figuring out what amount of money the relinquishing party is entitled to. Sometimes the value of the business – as an asset – is next to nothing, as can be the case in service businesses. In those cases it may be just an income stream that factors into support calculations. Sometimes the value is based largely upon inventory, as in direct sales. Sometimes the value is more difficult to quantify. Very often, an expert will be hired to look at the books, the tax returns, and so on, in order to determine the fair market value; essentially, this expert determines the worth of the marital share of the business on the open market.

Once a fair market value is determined, the next task is resolving how the out spouse is going to get paid. Sometimes the payout is a lump sum, sometimes it is paid out over time with interest. Sometimes it is an offset from other asset, such as equity in the house or a brokerage account, and sometimes it is set off by the taking of more debt.

Of course, in an ideal world – if you are the one retaining the business, that is – there would be planning, thorough bookkeeping and a good prenuptial agreement to help your business weather a stormy divorce. But, barring those, know that businesses can, and most often do, continue even after the marriage ends.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.